On June 19, 2014, the Supreme Court of the United States issued its much anticipated decision in Alice Corporation Pty. Ltd. v. CLS Bank International et al., confirming that computer-implemented inventions, such as computer software, remain eligible subject matter for patent protection in the United States. The unanimous decision of the court, written by Justice Thomas, also confirmed the court’s prior precedent that abstract ideas (such as the “concept of [the] intermediated settlement” at issue in this case) are not patent eligible. The Supreme Court confirmed that in accordance with its prior precedent, the mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention. There must be something more, such as additional features or steps that are more than “well-understood, routine, conventional activities” to provide practical assurance that a claim to a computer-implemented invention is more than a drafting effort designed to monopolize the abstract idea itself.

Case Background

Petitioner Alice Corporation Party, Ltd. is the assignee of patents that disclose a method for mitigating settlement risk. CLS Bank International filed a declaratory judgment action that it did not infringe the Alice patents and that the patents were invalid, inter alia, under 35 U.S.C. § 101. Alice filed counterclaims alleging patent infringement.

The patents at issue include method, computer-readable media and system claims. The claims require a computer to be used as part of the steps or elements of the claims (the parties stipulated that the method claims include the use of a computer).

Procedural History

Following the Supreme Court’s 2010 decision in Bilski v. Kappos, the district court agreed with CLS that all claims (method, computer-readable media and system claims) were patent ineligible under § 101, because they claimed the abstract idea of “employing a neutral intermediary to facilitate simultaneous exchange of obligations in order to minimize risk.” On appeal, the U.S. Court of Appeals for the Federal Circuit in a divided panel decision (Linn, J.), reversed the district court and found all claims to be patent eligible because it was not “manifestly evident” that the claims covered an abstract idea.

Shortly thereafter, the Federal Circuit, sitting en banc, issued a per curiam decision reversing the three-judge panel majority decision and affirming the district court’s decision, finding all claims to be patent ineligible. A five-member plurality (Lourie, J., joined by Judges Dyk, Prost, Reyna and Wallach) found all claims patent ineligible as abstract ideas. Judge Lourie stated that Alice’s claims “draw on the abstract idea of reducing settlement risk by effecting trades through a third-party intermediary,” and the use of a computer to maintain, adjust and reconcile shadow accounts added nothing of substance to the abstract idea.

In a portion of Chief Judge Rader’s opinion joined by Judge Moore, Judge Rader agreed with the conclusion of Judge Lourie’s plurality opinion that the method and computer-readable media claims were patent ineligible as abstract ideas. In another portion of Chief Judge Rader’s opinion, joined by Judges Linn, Moore and O’Malley, unlike Judge Lourie’s plurality opinion, Chief Judge Rader would have found that the computer system claims were patent eligible, with Judge Moore reaching the same conclusion in her separate opinion.

Judge Newman argued that all of Alice’s patent claims (method, computer-readable media and system claims) are patent eligible. Judges Linn and O’Malley reached the same conclusion in a separate opinion.

Certiorari

The Supreme Court granted certiorari to consider the question of “[w]hether claims to computer implemented inventions—including claims to systems and machines, processes, and items of manufacturer—are directed to patent eligible subject matter within the meaning of 35 U.S. C. § 101 as interpreted by this Court?”

Supreme Court Decision

In its unanimous decision, the Supreme Court affirmed the Federal Circuit’s per curiam decision, finding all claims patent ineligible. In reaching this decision, the Supreme Court first cited “the “important implicit exception” to § 101 that laws of nature, natural phenomena and abstract ideas are not patent eligible, citing the 2012 Supreme Court decision in Association for Molecular Pathology v. Myriad Genetics (Mayo). Justice Thomas reminded us that the Supreme Court has “interpreted § 101 and its predecessors in light of this exception for more than 150 years” and pointed out that “the concern that drives this exclusionary principle is one of pre-emption,” citing Bilski “upholding the patent ‘would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.’”

Citing Mayo, Justice Thomas emphasized that patent law should not “inhibit further discovery by improperly tying up the future use of these building blocks of human ingenuity.” However, he cautioned that “[a]t the same time, we tread carefully in construing this exclusionary principle lest it swallow all of patent law” because “[a]t some level, ‘all inventions … embody, use, reflect upon, or apply laws of nature, natural phenomena, or abstract ideas.’”

Justice Thomas next discussed the “framework” set forth in Mayo for distinguishing patents that claim laws of nature, natural phenomena and abstract ideas from those that claim “patent-eligible applications of those concepts.” First, the Supreme Court must determine whether the claims at issue are directed to one of those patent-ineligible concepts. If so, the court next asks “[w]hat else is there in the claims before us?” To answer that question, Justice Thomas pointed out that the elements of each claim must be considered individually and as an ordered combination to determine whether the additional elements “transform the nature of the claim into a patent-eligible application.” He stated that “[w]e have described step two of the analysis as a search for an ‘inventive concept’—i.e., an element or combination of elements that is ‘sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself’”.

The Supreme Court then found that Alice’s claims at issue were drawn to an abstract idea:

It follows from our prior cases, and Bilski in particular, that the claims at issue here are directed to an abstract idea. Petitioner’s claims involve a method of exchanging financial obligations between two parties using a third-party intermediary to mitigate settlement risk …

Like the risk hedging in Bilski, the concept of intermediated settlement is ‘a fundamental economic practice long prevalent in our system of commerce.’

The Supreme Court rejected Alice’s argument that abstract ideas should be limited to preexisting, fundamental truths that exist in principle apart from any human action, pointing out that Bilski belies this assertion because the risk hedging in that case was a “fundamental economic practice.”

Next, the court reviewed whether Alice’s claims contained something more than the abstract idea itself sufficient to render the claims patent eligible. The Court found they did not:

Because the claims at issue are directed to the abstract idea of intermediated settlement, we turn to the second step in Mayo’sframework. We conclude that the method claims, which merely require generic computer implementation, fail to transform that abstract idea into a patent-eligible invention.

Justice Thomas next discussed the second step in the Mayo analysis: examining a patent claim to determine whether it contains an “inventive concept” sufficient to “transform” the claimed abstract idea into a patent-eligible application. The Supreme Court indicated that a claim that recites an abstract idea must include “additional features” to ensure the claim is more than a drafting effort designed to monopolize the abstract idea, and transformation into a patent-eligible application requires more than simply stating the abstract idea while adding the words “apply it.” The court also found that introduction of a generic computer into the claims does not alter the analysis in the second step of the Mayo analysis and is not enough to convert a patent ineligible abstract idea into a patent eligible invention. “The relevant question is whether the claims here do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer. They do not.”

Concurring Opinion

Justice Sotomayor, in her concurring opinion joined by Justices Ginsburg and Breyer, would have found that all claims to business methods are patent ineligible. “I adhere to the view that any ‘claim that merely describes a method of doing business does not qualify as a ‘process’ under § 101.’” However, she concurred with the majority opinion by Justice Thomas that the claims at issue are drawn to an abstract idea and therefore joined the opinion of the court.

Practice Note

The Mayo two-step test, although unsatisfying to many commentators, is the test that the U.S. Patent and Trademark Office and the courts will be tasked with applying in determining whether a computer-implemented invention is patent eligible under § 101. Under the two-step analysis, a patent examiner or judge will first determine whether the claim is drawn to a patent-ineligible abstract idea. If the answer is “yes,” then the second step will be to review the claim to determine whether it contains an “inventive concept” sufficient to “transform” the claimed abstract idea into a patent-eligible application. In step two, the reviewer will need to determine if a claim includes “additional features” to ensure the claim is more than a drafting effort designed to monopolize the abstract idea. The transformation into a patent-eligible application will require more than simply stating the abstract idea while adding the words “apply it” to a particularly technological environment. Also, introduction of a generic computer to apply the steps of the claim will not be enough to convert a patent ineligible abstract idea into a patent eligible invention.